TMI Blog1981 (3) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the reserves should betaken at Rs.. 46,11,711 as shown in the accounts of the assessee and not at Rs. 24,22,429 as shown in the balance-sheet as on 31st March, 1962. The assessee's contention was that the loss had been adjusted in the balance-sheet as it was required under the provisions of the Companies Act, but the assessee's accounts disclosed the reserves at Rs. 46,11,711 and that, according to the provisions of the S.P.T. Act of 1963, the reserves were to be taken as shown in the accounts and not as shown in the balance-sheet. The ITO did not accept the assessee's contention. He was of the opinion that the reserves and losses could not co-exist and the real state of affairs of the assessee-company was disclosed by the balance-sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sie Jute Company and, therefore, rejected the revenue's contention. In the circumstances aforesaid, the Tribunal has referred to this court under s..256(1) of the I.T. Act, 1961, the following question: " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that in computing the capital base of the assessee-company the reserves should be taken at Rs.46,11,711 as shown in the accounts and not at Rs. 24,22,429 as shown in the balance-sheet as on 31st March, 1962, after adjusting the loss of Rs. 21,89,282 ?" Now, as the Tribunal had referred to the decision in the case of Dalhousie Jute Company for the assessment year 1963-64, it may not be inappropriate to refer to the reasonings of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 of the I.T. Act, 1961, and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian I.T. Act, 1922, or the I.T. Act, 1961, diminished by the amount by which the cost to it of the assets the income from which, in accordance with cl. (iii) or cl. (vi) or cl. (viii) of r. 1 of Sch. I, is not includible in its chargeable profits, exceeded the aggregate of the amount mentioned in the different clauses. So far the material question is whether the computation of the capital would be made of the amounts as on the first day of the previous year relevant to the assessment year. Now, the scope and purpose for its determination under this rule has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve.' What is the true nature and character of the disputed sum, must be determined with reference to the substance of the matter and when this is borne in mind, it follows that on the 1st of April, 1946, which is the crucial date, the sum of Rs. 5,08,637 could not be called a 'reserve', for, nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. On the other hand, on the 28th February, 1946, the directors clearly earmarked it for distribution as dividend and did not choose to make it a reserve. Nor did the company in its meeting on the 3rd April, 1946, decide that it was a reserve. It remained on the I St of April as a mass of undistributed profits which were available for dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any purpose to which it may be put in future. Therefore, giving to the 'reserves' its plain natural meaning it is clear that the sum of Rs. 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of rule 2'. The directors had no power to distribute the sum as dividend. They could only recommend, as indeed they did, and it was up to the shareholders of the company to accept that recommendation in which case alone the distribution could take place. The recommendation was accepted and the dividend was actually distributed. It is, therefore, not correct to say that the amount was kept back. The nature of the amount which was nothing more than the undistr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a mass of undistributed profits which is not earmarked for meeting any particular demand of the company and the directors had decided to treat it as a reserve, then certainly that amount can be maintained as a reserve. But if the directors had chosen in the balance-sheet to treat an amount as adjusted against a particular contingency, viz., the loss in this case, then in our opinion, this amount cannot be said to be available for a future use by the company which is the fundamental test as enjoined by the scheme of the S.P.T. Act, 1963. After all, in a matter of this nature, it has also been emphasised that the substance of the matter should be looked into. If an amount has for all practical purposes been decided to be adjusted aga ..... X X X X Extracts X X X X X X X X Extracts X X X X
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